Despite a softening world economy, Morningstar’s economic forecast for the US remains relatively unchanged. We have upped the 2015 growth by a seemingly small 0.1%; however, we think the higher end of the range is more likely than we would have believed just three months ago.
If someone pinned us down now, we think GDP growth for the full year is likely to come in at 2.5%. That is partially because the second-quarter rebound was better than previously expected. In addition, the data we have seen so far in the third quarter, especially on the consumer side, suggest that annualised sequential growth in the third quarter could be close to 3%.
The consumer has continued to do well, net exports haven't yet proved to be the disaster everyone expected – mainly because imports have done as poorly as exports, and government spending is no longer falling. Housing continues to provide a meaningful contribution to overall GDP growth, too. Business investment spending remains soft.
What Changed in the Third Quarter?
Most of the change we saw over the past quarter related to China. The Chinese currency was devalued, and many Chinese economic indicators continued to slow. Many of us at Morningstar have been warning about China for some time.
China has showed lower growth rates and missed growth forecasts for several years. It's not new news. Still, the devaluation brought some already well-known weaknesses to the forefront. And as we have long been expecting, a slowing China generally has helped the U.S. economy as the small decrease in exports has been more than offset by lower commodity prices, which puts more money in consumer pockets.
The other big news was that expectations of a Fed rate increase continue to get pushed out in time. At the end of 2014, some speculated that the Fed might take action as early as March 2015. Now in September, a rate increase by December is by no means a done deal. Oddly, the labour market improved more than the Fed expected, and inflation was just a little short of the Fed's plan, yet the Fed still deferred a rate increase at its September meeting. They noted worsening conditions in China that could potentially slow the U.S. GDP growth rate and employment outlook.
As we note above, we are less worried than the Fed about China and wish the Fed had just got on with it and implemented a small rate increase. Now the Fed has sowed doubts and created uncertainty for investors and business people as they openly fret about world growth rates. Uncertainty is the market's worst enemy, and the markets have reacted accordingly. U.S. equity and emerging markets were little changed at the 2015 halfway point.
Now, nearing the end of the third quarter, the S&P 500's year-to-date performance looks to be down in the mid-single digits, and emerging markets a more worrisome mid-teens decline.
US Growth Looks Healthy; But Longer-Term Headwinds Weigh
Looking forward, the U.S. still appears to be in a decent position relative to the rest of the world, with smaller dependence on world trade than just about anybody else. And a very healthy U.S. consumer doesn't hurt, either.
That's not to say that the U.S. economy will be immune to world problems. While the metrics cited above for the U.S. consumer look quite positive, they aren't accelerating much, and some have looked slightly weaker going into the latest month. And after a brief pause, manufacturing is looking a little softer again, probably related to renewed weakness in oil and commodities.
However, with a lot of data available through the third quarter, the die is cast for a relatively strong 2015, which will likely be one of the strongest years of the recovery. But long-term demographics are likely to keep a long-term lid on growth at 2.0% to 2.5%.
